Mortgage bankers and lenders across the U.S. want real estate owners to know one very important fact: debt is widely available for retail properties after a couple of years of being hard to come by.
People are still trying to figure out if there’s debt for retail properties, says Tom Melody, managing director with Walker & Dunlop. They’re wondering if they should be out in the capital markets, talking to lenders, and they’re curious if they’ll be able to get attractive pricing. The answer is yes, to all of it. But I don’t think a lot of people know that’s the case.
Melody notes that the lion’s share of capital was not really interested in retail in 2021. And if they were, their interest was limited to grocery-anchored centers, which are widely viewed as the most recession-resistant property type within the retail sector.
But lender sentiment has shifted significantly, Melody says. Last week, he attended the 2022 Commercial/Multifamily Finance Convention and Expo in San Diego, hosted by the Mortgage Bankers Association (MBA). During the event, he dined with the heads of real estate or heads of loan originations for 22 different lenders.
After witnessing the performance of various retail property types throughout the pandemic, lenders are feeling more comfortable with the asset class. Of equal importance, however, is the current composition of their existing portfolios, according to Claudia Steeb, managing director of JLL Capital Markets.
Most lenders, be they life companies or debt funds, are overweighted on the hot property types, specifically multifamily and industrial. As a result, they need to balance out their portfolios.
By focusing on multifamily and industrial loans for more than two years, lenders have built lower-yielding portfolios. Now, they’re realizing they must diversify into other property types to increase yields, not only for individual loans, but their overall portfolios.
Retail is no longer a four-letter word, Steeb says. For the longest time, when I would call any lender, they’d say, Please tell me you’re not calling about a retail deal.’ Now they say, What do you have?’
Sponsorship matters more than ever
A couple of months ago, Steeb and her capital helped an affiliate of Lone Star Funds find debt financing to acquire Legacy Place, 424,500-sq.-ft. open-air retail center in Palm Beach Gardens, an affluent community 70 miles north of Miami that ranks among the wealthiest and most exclusive areas in the nation.
Completed in 2006 to 2007, Legacy Place’s open-air concept offers a walkable format and outdoor common areas with dining options. It is anchored by Best Buy, Barnes & Noble, Total Wine & More, Michaels and Petco, all of which are original tenants of the center. Other tenants include Ethan Allen, Miami Children’s Hospital, The Container Store, Bassett Furniture, The Capital Grille, Chili’s Grill & Bar and Five Guys.
The deal had a strong value-add component with a plan for re-leasing and some potential redevelopment opportunities, necessitating a flexible lender and a floating-rate loan, according to Steeb.
Yes, Lenders Are Interested in Financing Retail Properties
The strength of the sponsor garnered interest from about 50 percent of the lenders that Steeb and her team contacted. The number decreased as the deal moved into the underwriting stage, and Wells Fargo Bank ultimately provided a three-year, floating-rate loan.
Steeb acknowledges that if she came to market with this deal today, it might have received more interest from lenders. However, she doubts the outcome would be any different, given the terms she and her team were able to negotiate with Wells Fargo.
One of the first questions I get from lenders today is: Who’s the sponsor? Steeb says. Regardless of the type of retail asset, lenders want an experienced sponsor. They don’t want to catch a falling knife excellent site to observe. They want to work with borrowers who have established relationships with retailers and who know how to operate these properties.